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Chile: Strikes and regulations strain mining sector

Risk Outlook

Chile’s mining sector will face a number of headwinds in 2017, as contract renewals lead to protracted, and potentially violent, strike activity. Despite a generally supportive business environment, more stringent environmental regulations will weigh on the cost competitiveness of the mining sector.

Security Environment

There is an elevated risk of strikes and protests in Chile’s mining sector in 2017, as a number of mines face contract renewal negotiations with workers. In February and March 2017, a 43-day strike over contracts by 2,500 workers forced Anglo-Australian mining firm BHP Billiton to suspend operations at its majority owned Escondida site. It is estimated that the halt in production cost BHP Billiton and its partners almost USD 1 billion. The strike ended without resolution, as workers invoked the right to extend their previous contracts by 18 months.

Further to this, contract renewal talks are due in at least 15 other mines in 2017, including at mines owned by state-firm Codelco and Anglo-Swiss company Glencore. Violent protests in relation to labour disputes can cause property damage for private companies. An estimated 300 protesters attacked installations and cut power supplies at the Escondida mine during strike action in February 2017.

A similar incident occurred in November 2016 when protesters stormed the Los Bronces copper mine, setting fire to barricades and causing mining company Anglo American to suspend operations for three days.

Trading Environment

Chile’s economic performance will be weak in 2017, with real GDP growth forecasted at 2.0%. There are a number of headwinds to the economy. In Q1 2017, disruptive strikes at the Escondida mine and a destructive wildfire weighed on economic activity. Mining strikes have strained the economically important mining sector, which has already been under pressure as a result of low mineral prices and falling ore grades. The mining sector lost 8.4% of its workforce in 2016. Economic activity will be driven by private consumption in the medium term, which is forecasted to grow by 2.2% year-on-year in 2017.

Chile has strong sovereign credit credentials. The budget deficit is expected to remain stable at 2.8% of GDP in 2017, as the government complies with a fiscal rule requiring a cyclically adjusted balance. As a result, the 2017 budget cut spending on capital expenditure. However, it may become increasingly difficult for the government to rein in spending. 70% of the budget is spent on wages, social security and subsidies, areas in which it is politically difficult to implement cut backs, particularly ahead of the November 2017 general election.

Investment Environment

Chile is the world’s biggest producer of copper, and a supportive business environment has facilitated its position as a top investment destination for global mining firms. Confiscation or expropriation of assets is unlikely in Chile. The country has the highest number of free-trade agreements in the world, many of which provide protection of assets from expropriation.

However, the mining sector’s value is expected to contract by 1.5% in 2017, partly as a result of stringent environmental regulations weighing on cost competitiveness. The country’s environmental regulator, the Superintendencia del Medio Ambiente, has been pursuing mining companies who fail to adequately manage scarce water resources. In October 2016, the body brought nine charges against the Los Pelambres copper mine, operated by Antofagasta Minerals, for mismanaging water.

In August 2016, Kinross Gold halted operations at the Maricunga mine after the government shut down the mine’s water system, citing environmental damage. Environmental scrutiny may also tighten in 2017, as a result of a pending glacier protection law. The act still requires congressional approval, but if enacted could result in planned projects that affect Chilean glaciers being cancelled or subject to contract revisions.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Bangladesh, Venezuela, Rwanda and Ghana, all of which have been the subject of recent enquiries from JLT's client base.

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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